Sunday, December 3, 2023

Dairy debt at risk if milk price fall lasts

Avatar photo
Farms in a better position than they were in 2015, but a prolonged slump would put farms in ‘trouble zone’.
Data modelling by Figured shows the effect the fall in the forecast milk price will have on New Zealand dairy farm debt levels.
Reading Time: 2 minutes

New data modelling from agribusiness financial management company Figured underlines the slide in economic fortunes facing the dairy industry following the fall in the milk price forecast in August.

The modelling of 1000 farms shows the bulk of these farms – which were in a positive financial position in 2022 – diving into a “trouble zone”, Figured chief executive David Dodds said.

A large percentage of farms will be going into what he described as “an area of financial performance that the banks will be monitoring very closely because they become an at-risk sector of the portfolio where their interest cover and their profit are no longer at a range where they can say, ‘This is fine’.”

He is confident the industry will bounce back if the fall in payout lasts only 12 months because there will be bank support.

However, that support could be in question if the fall in payout remains over the medium term of two to three years.

The fall in milk price has coincided with a spike in interest rates and at least one of those factors will need to change over the medium term, he said.

“Farmers need to get a sensible, practical, pragmatic plan in front of their banks so their banks know how they’re going to react to it, and they can see they’re reacting to it.

“That’s what they will want to see from their customers who are in the red,” he said.

He expects it will take farmers at least two seasons to get back to where they were, assuming the milk price bounces back.

“The key thing will be getting interest rates back. It’s a massive expense item on the farm. Interest rates going back from 8% to 4% will make a huge difference.”

He believes the sector is better prepared to handle this situation compared to the last downturn in 2015.

“People know what they have to do. They know the run sheet more than what they knew in 2015.”

The company created the modelling as part of a presentation for the Reserve Bank for its upcoming financial stability report to be released in November. 

The presentation looks at what depth of support will be needed from the banking sector to help farmers get through the fall in payout.

The modelling looks at net profit and interest cover on 1000 farms of all types and locations across the country.

Dodds defines interest cover as the amount of times a farmer can pay off the interest required to pay for running the farm at a cash level. If a farm has an interest cover of one, the farmer will have nothing left after paying off the interest. If the farm has an interest cover of two, the farmer will have the same amount of net cash available after paying off the interest.

“Anything under 1.5 gets the banks worried.”

This is because that farm only needs a slight negative nudge and it will struggle to pay off its interest, he said.

People are also reading